Monday, November 24, 2008

Business Press Begins to Recognize Inflationary Consequences of Bailout

Commentary on the likelihood of inflation is moving from goldbugs and fringe economists into the business mainstream. Bloomberg is beginning to give credence to the threat:

The Federal Reserve, which has already pumped out hundreds of billions of dollars, might formally adopt a policy of flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.

There’s always a danger the Fed and Treasury may go too far, setting the stage for a big rise in inflation or another asset bubble down the road as the economy revs up and investors get back their nerve. (snip)

Bernanke and Paulson might welcome a bit of that exuberance right now -- even at the risk of higher inflation later -- as they try to prevent the biggest credit catastrophe in decades from sending the economy into a deflationary nosedive.

“It’s true that, over the long run, too much money creates inflation,” says Lyle Gramley, a former Fed governor now at the Stanford Group Co. in Washington. “But they’re trying to keep the economy from going over the precipice and into the abyss.”

Thanks Bloomberg! I've bolded the passages above that support what I've been saying since the bailout was initiated. Flooding the world with extraordinary amounts of new dollars will have a very predictable result: inflation. They used that word three times in the article.

I soon expect Mish Shedlock and Noriel Roubini to revise their opinions dismissing the possibility of inflation. That's why I track their blogs in my blogroll; I pay attention to their well-informed commentary.